ESG and Sustainability
ESG Data: Learning from Rock & Roll
Digging into the Deeper Value of ESG Data
The value of ESG data often lies less in the direct links to a financial reporting lines than in the insights it can provide into how a company is managed, observed Gerry Garvey, Co-Head of Equity Research of BlackRock at the UBS Americas Sustainable Finance Virtual Conference. He compared ESG insights to the “brown M&M™” test used by the 1970s rock band Van Halen.
Van Halen required concert organizers to supply bowls of M&Ms™ in the band’s accommodations but specified that there be no brown M&Ms™ in the mix. The brown M&M™ prohibition was embedded in lengthy contracts that included detailed safety requirements around the use of the pyrotechnics and lighting displays featured in the band’s performances.
If the band arrived at their accommodations and found brown M&Ms™ in the bowl, they took that as a tipoff that the organizers and venue management hadn’t carefully read the contract and may not have met its safety requirements. Failure to do so could endanger the band and concert goers.
Similarly, “a lot of what we track isn’t causal, but in a way it’s more important,” said Garvey of ESG measurements. “You ask yourself, what kind of company would do that?”
My personal view is I would stop trying for standardization. There is no single number that will tell you the value of the company
Because of the nature of these insights, Garvey said, “My personal view is I would stop trying for standardization. There is no single number will tell you the value of the company.” A company’s rising in ESG scores can be more a sign of its growing expertise in gaming third-party rating agencies than a sign of fundamental change.
On environmental impact, emissions remain the most important data area. “We are huge fans of emissions data,” noted Garvey, calling such measures “a good, first-order indicator of what companies are doing. “This information is valuable even for companies that have very low emissions because it’s an indication of overall efficiency.
“If you see a company that’s controlling its emissions while maintaining its revenue, it’s usually doing something good,” he said. He described the challenges of collecting emissions data, including methods being used to deal with the “double-counting,” a problem with some vendor data.
On the social dimension, sites such as Glassdoor offer views on how employees’ experiences. Recruiting advertising and LinkedIn, which can help map organizational responsibilities, and are also potential sources of insights into compensation and employee benefits. One area deserving more research is companies’ impact on their communities, Garvey said.
For governance topics, data vendors are often good at curating and presenting information on board votes. Many companies themselves also supply detailed information on board assignments and actions. He noted that a side effect of the push to diversify boards may be the “over-boarding” of some directors.
In the final analysis, most ESG data that’s meaningful should be slow changing, Garvey said. Most companies find it difficult to make significant improvements in a short period of time. For example, a company looking to reduce its carbon footprint can’t easily alter power-supply arrangements.
Julie Hudson, Global Head of ESG Research, described how UBS equity analysts approach ESG in their research. Their focus is on tracking how companies are responding to their operating environment and competitive situation. Analysts are using ESG data and insights to identify “structural changes that will affect how companies will perform.”
Garvey noted that companies’ ESG reports fall short in many respects and lavishly produced documents may constitute a cautionary signal: “What kind of company would make a 60-page disclosure that ticks every conceivable box? Sad truth is that it’s generally companies that have deep issues.”